China, the world's largest energy user, signaled last week it wanted to draw more private investment into its energy sector as part of a plan to fast-track infrastructure investment to shore up economic growth.

It is drafting detailed guidelines to encourage private investment across industries, with a special focus on heavily state-controlled electricity, oil and natural gas, the official Xinhua news agency reported.

Conventional oil, gas and coal production is highly profitable in China but is dominated by state firms. Subsidies, state monopolies and government control on energy prices have made refining and power generation money-losing businesses.

Downstream segments such as gas storage, which produce steady returns, is an area that could attract private money. Gas distribution is another possibility because of strong earnings prospects, but state firms are already muscling in. Arguably, the sector in most need of new investment is unconventional energy, such as shale gas, which could potentially curb China's reliance on foreign oil and gas.

Still, without detailed rules and incentives, China may find few takers from the private sector in any area, let alone unconventional energy.

"It is not sufficient to say the energy sector will be open to private capital. The power generation industry has been open to private enterprises for more than 20 years, but who would have the guts to put money in the business?" said Lin Boqiang, director of the China Centre of Energy Economics at Xiamen University in southeast China.

"If China wants to make a material breakthrough in attracting private capital, it has to come up with some incentives to protect returns," he said.

EMPTY PROMISE?

It is not the first time that senior policymakers have tried to draw private capital to areas dominated by state firms. Sources told Reuters last month that China's reformers sensed an opportunity to push through a series of changes before President Hu Jintao and Premier Wen Jiabao step down early next year, so that view could be behind the latest push.

PetroChina Chairman Jiang Jiemin told a media briefing last week that private firms will be welcomed as investors in the country's third cross-country West-East gas pipeline, although others say such a prospect is a difficult sell.

"It's hard for private capital to participate in this giant pipeline project because gas prices are controlled by the government, the investment is huge and it usually takes more than a decade to get the return," said Xu Bo, a researcher with China National Petroleum Corp, the parent of PetroChina.

Private investors may also be wary of the risk of nationalization. Beijing forced private owners to sell to the government when it nationalized the oil industry in northern Shaanxi in 2005 and the coal mining sector in Shanxi province in 2009. It set off protests that made international headlines.

SHALE CHALLENGE

China is examining interest in shale gas exploration, an area with huge potential, but which is also a big challenge.

"Surprisingly, the first to show interest are those outside our vision... Many are private companies," Li Yuxi, researcher at the strategic research centre of the Ministry of Land and Resources, said in an industry conference last week.

The National Energy Administration of China has targeted production of 6.5 billion cubic meters (bcm) of shale gas by 2015, or roughly 6 percent of China's current total gas production. It aims to boost output to 60-100 bcm in 2020, a level many experts say is over-ambitious given the technological, environmental and geological challenges.

China has yet to build and lay all the pipelines needed to transport shale gas, most of which is believed to be located in mountainous areas or places far from markets, or to build sufficient plants to process and store the gas.

"It seems to me that the government very badly underestimates the time and the cost. In particular, they underestimate the need to build ... processing plants and pipeline infrastructure," said Al Troner, president of Houston-based Asia Pacific Energy Consulting.

"You need to incentivize private investment and more development of the oil service sector to improve efficiency and develop technology to access and develop the shale gas," said Scott Darling, head of Asia Oil and Gas at Barclays Capital.

Without that, it may take some years before China develops the shale gas sector at all.

Zhou Jiping, vice chairman of PetroChina, the country's dominant oil-and-gas producer, has said the state company will prioritize tight gas and coal seam gas over shale gas because the latter is more costly to extract.

"Shale gas is a long-term story for China. You are not going to see much progress in the next five years," said a source close to PetroChina's shale gas strategy, who asked not to be identified because he was not authorized to speak to the public.